Favorable demographic trends and the sector’s strong performance during the pandemic have helped attract capital, says InterFace panel.
By Matt Valley
Aron Will refers to active adult as the “chameleon asset class” because it exhibits characteristics of both the multifamily and seniors housing sectors. “Quite frankly, there are more characteristics of seniors housing than people give it credit for,” said the vice chairman and co-head of National Senior Housing for CBRE.
But from an investment sales standpoint, many buyers and sellers view the sector through a prism that is either distinctly multifamily or seniors housing, he explained. “In order to appropriately tackle active adult, you have to have consummate seniors housing professionals and consummate multifamily professionals tackling it together.”
The insights from Will came during the capital markets panel discussion at InterFace Active Adult: A to Z on the Hottest Trend in Seniors Housing.
Hosted by Seniors Housing Business and the InterFace Conference Group, the one-day conference took place at the Westin Galleria in Dallas on Aug. 4. The event, which brought together owners, operators, investors and developers active in the space, drew slightly more than 300 attendees.
Fellow panelists included Ari Adlerstein, senior managing director with Meridian Capital Group; and Don Pelgrim, CEO, Wilshire Finance Partners. Don Husi, managing director with the Senior Housing & Care Finance Practice at Ziegler, moderated the discussion.
Although the definition of this asset class is loosely defined and still evolving, active adult communities offer relatively maintenance-free independent living residences to persons age 55 and above, according to Where You Live Matters, a consumer website launched by the American Seniors Housing Association in 2016.
Alternative definitions go so far as to say that the properties offer activity calendars and dining but provide minimal to no health services.
The one point everyone can agree on is that investor interest in this asset class is strong and gaining momentum as the graying of America continues.
Vast array of investors
“You’ve got five distinct categories of investors chasing this asset class today, which is pretty fascinating,” said Will.
The first group is the “tried and true” seniors housing investors such as Harrison Street, Focus Healthcare Partners and Chicago Pacific Founders. “In other words, this group has not historically spanned the multifamily and seniors housing investment spectrums like Carlyle Group and AEW, for example,” according to Will.
The third group of investors in the active adult space includes large and mid-sized healthcare real estate investment trusts (REITs). For example, Welltower recently announced partnerships with Treplus Communities and Sparrow Partners, two developers of active adult rental communities.
The fourth group chasing this asset class today includes the private equity multifamily investors. And the fifth group features the owner-operators in the seniors housing and multifamily space.
Husi said the widespread interest in active adult is largely because “the demographics are finally here.” The oldest baby boomers, persons born between 1946 and 1964, turn 75 this year and the youngest are now in their late 50s. Nearly 70 million Americans are part of this age group, or about 20 percent of the population. The majority are active and in good health.
“The most important thing we can do as an industry is try to define how active adult is different than independent living in the seniors housing world, and what are the benefits for this consumer relative to the multifamily world,” said Husi.
“That gets back to the question I asked earlier today in one of the sessions: ‘What is the value proposition, and how can we clearly define that?’ If we can get that down to a very precise definition, I think we will have lenders coming into the space all day long — as long as we can put it in a box and define the risk profile for it,” explained Husi.
Strong track record
Over the last 16 to 18 months — basically since the COVID-19 pandemic struck the U.S. — the asset class has achieved rent collections of nearly 100 percent and positive net absorption, according to Will. Leasing activity at active adult properties slowed in 2020, but it didn’t come to a standstill, he emphasized. (By all accounts, no real estate research firm tracks the sector on a regular basis.)
The private-pay seniors housing sector, which includes independent living, assisted living and memory care, has not fared nearly as well. Occupancy in the 31 primary markets tracked by NIC MAP dropped from 87.7 percent in the first quarter of 2020 to 78.7 percent in the first quarter of 2021 and held steady in the second quarter. The annual absorption rate in those 31 primary markets decreased 4.3 percent in the second quarter of 2021 while annual inventory growth was up 2.8 percent.
Construction lending dwindles
While plenty of knowledgeable, experienced equity players are investing in the active adult space, there is a “lack of lenders” financing the product, according to Husi. He asked the panel to explain the possible reasons for the relatively small pool of debt financing sources and to provide a near-term lending outlook for borrowers.
The pandemic played a factor, according to Adlerstein, the mortgage banker. “We found during the last year-and-a-half that a lot of our go-to construction lenders exited the space. Suddenly, some of them are starting to crawl back in. But some of the folks that we could just rely on — send out a deal and get five term sheets 24 hours later — took a huge step back during COVID. And a lot of them are still in a wait-and-see approach.”
Bank consolidation could also be a factor. Research produced jointly by Ziegler and NIC shows that from 2019 through the first half of 2021, there were 12 bank consolidations or financial partnerships announced that impacted the seniors housing and care lending space. The 25 entities involved in those deals have been reduced to 12.
Adlerstein said the more knowledgeable lenders become about the active adult space, the more comfortable they will be in making loans. Multifamily developers and lenders are accustomed to perhaps 15 move-ins per month at a property during the lease-up period, pointed out Adlerstein, but for active adult assets the lease-up occurs at a slower pace.
“The multifamily guys are not thinking as much about the market demographics as far as mom and dad having to sell their house in order to move into an active adult community, or what are the rooftop prices,” explained Adlerstein, emphasizing that there is a learning curve involved.
Pelgrim of Wilshire Finance, which provides bridge loans to the seniors housing industry ranging from $1 million to $10 million, as well as hybrid equity and permanent loans, said there isn’t a one-size-fits-all approach to vetting a potential lending transaction.
“We’re really tearing each deal apart in trying to understand why the [operator] is in a particular market, what’s unique about its business plan, what is really going to be the driver for that facility, and does it have the team and the chops to pull it off?”
In short, Wilshire takes a hard look at both the commercial real estate and operating business components of a prospective deal.
Lenders play it safe
Recourse financing, which enables a lender to recoup its investment in the event the borrower fails to pay, is widespread in the active adult sector today, the panel agreed. That’s particularly true in the case of a bridge lender such as Wilshire.
“We’re going to be that gap or interim financing generally that offers speed, flexibility, those sorts of attributes typically needed in a deal. Usually there is a little bit more of a story to those kinds of transactions,” said Pelgrim.
In other words, if an asset is not fully stabilized or is not performing at a desired level, the solution may be best suited for a bridge lender as opposed to an agency or bank lender.
“We generally do get recourse on the loans that we do,” said Pelgrim. “But occasionally, depending on the amount of leverage and the sponsorship and what we’re being asked to do in terms of structure, we will do some deals on a non-recourse basis.”
Adlerstein said that in today’s market, his first question to any non-institutional client that is seeking construction financing is whether it will agree to sign off on the use of recourse debt.
“For the institutional guys, we’ve been successful, even throughout COVID, in finding some non-recourse construction financing, but it’s difficult,” says Adlerstein.
Commercial banks will typically max out at 60 to 65 percent leverage if they are the senior lender in a deal, according to the panelists. Borrowers seeking a higher leverage point or who prefer non-recourse financing may want to consider an A/B note structure. The use of mezzanine debt or preferred equity is another option. Lastly, there are debt funds providing construction financing in the seniors housing and active adult space.
Price point is critically important to lenders, said Will. More specifically, lenders want to know what’s included in the base rent at a particular community and how the pricing compares with independent living and market-rate Class A apartments in the local market.
“What we found inherently is that the lending community is much more comfortable with a 20 to 25 percent premium to market-rate Class A apartments than a 60 or 80 percent premium,” he said.
There are ways to make the price point more affordable. For example, an active adult community that operates a commercial kitchen might want to offer meals on an a la carte basis rather than bake the cost into the base rent, said Will.
He pointed out that lenders with experience financing active adult properties understand that there is a certain price point that resonates with prospective residents, and which leads to a quicker lease-up. n